Structured notes issued by banks, seek to buffer a level of losses in return for a cap on gains, but may come with drawbacks — including concentrated credit risk, lack of transparency and lack of liquidity.
The Buffer Protect Strategy seeks to add a level of downside protection and upside growth potential to portfolios. The strategy is available — with daily liquidity, transparent pricing, and without the risk of default by the issuing bank — in exchange-traded funds (ETFs) mutual funds.
The Buffer Protect Strategy is an option strategy designed to protect against a specific level of losses in a reference asset (e.g., an index or ETF) over a specific period of time (the "Target Outcome Period"). In return for this protection, there is a cap on investment gains. The cap level is set at the start of the Target Outcome Period, such that giving up potential returns above the cap pays for the buffer protection.
The strategy’s returns will be a function of the level of the reference asset at the end of the Target Outcome Period relative to its level at the start of the Target Outcome Period, as shown below.
If the reference asset appreciates more than the cap level:
The Buffer Protect Strategy seeks to provide a total return that equals the predetermined cap level.
If the reference asset appreciates, but less than cap level:
The Buffer Protect Strategy seeks to provide a total return that increases by the percentage increase of the reference asset, up to the predetermined cap level.
If the reference asset decreases by less than the buffer:
The Buffer Protect Strategy seeks to not participate in losses inside the buffer range.
If the reference asset decreases, but more than the buffer:
The Buffer Protect Strategy seeks to provide a total return that is better than the price returns of the reference asset by the buffer percentage.
The strategy is available in ETFs and mutual funds, and investors can select the level of buffer protection (for example 0 to -10% or -5% to -30%) needed depending on their individual risk tolerance. To learn more about the specific investment products, click on one of the buttons below.
Whether as a structured note or as a fund, the Buffer Protect Strategy is built using options. In case of a structured note, the issuer of the note issues the note, but buys the portfolio of options to hedge itself. In the case of the fund, the fund buys the option portfolio directly, eliminating the issuing middle man. By virtue of owning shares of the fund, the fund's shareholders indirectly own the options and through that get access to the Buffer Protect Strategy.
Cboe Vest was founded in 2012 based on the conviction that investors desire more certainty in their investment outcomes. To address this market need, Cboe Vest created Target Outcome Investments®, which target a defined return profile, with an allowance for a specific level of risk, at a particular point in time.